69790 Vietnam: Review of Gas Master Plan Workshop Version Report Review of the Master Plan for Gas Development in Southern Vietnam July 2007 submitted to the World Bank by: Economic Consulting Associates Economic Consulting Associates Limited 41 Lonsdale Road, London NW6 6RA, UK tel: +44 20 7604 4545, fax: +44 20 7604 4547 email: info@eca-uk.com D:\ECA\A1FILES\Projects\249 - Vietnam Gas Master Plan\Docs\Task 1\Vietnam GMP~Workshop Rpt~v1.doc 29/8/07 Contents Contents Contents i 1 Introduction 1 2 Summary 3 2.1 Economic analysis to support the proposals 3 2.2 Remove inconsistencies in the GMP and with the PMP 4 2.3 Implementation strategy 4 2.4 Presentational issues 4 3 Gas supply sources 6 3.1 Supply scenarios 6 3.2 Potential reserves 7 3.3 Longer-term developments 13 3.4 Costs 13 3.5 Summary 14 4 Gas consumption market 15 4.1 Overall approach 15 4.2 Power 16 4.2.1 Gas supplies in the Power Master Plan 17 4.2.2 Integration between PMP and GMP 18 4.2.3 Demand-side constraints 20 4.2.4 Review of PMP and GMP development forecasts 21 4.3 Fertiliser and other chemicals 23 4.4 Industrial 24 4.4.1 South-East area 24 4.4.2 South-West area 25 4.5 CNG 25 4.6 Summary 26 Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 i D:\ECA\A1FILES\Projects\249 - Vietnam Gas Master Plan\Docs\Task 1\Vietnam GMP~Workshop Rpt~v1.doc 29/8/07 Contents 5 Gas supply-demand balance 32 5.1 Supply cases 32 5.1.1 South-East area 32 5.1.2 South-West area 34 5.1.3 Potential scenario for the South region 36 5.2 Meeting shortfalls in supply 37 5.3 Customer prioritisation 38 5.4 Summary 39 6 Gas infrastructure development and investment plan 40 6.1 Infrastructure development plan 40 6.2 Investment plan 41 6.2.1 Gas resources 42 6.2.2 Gas collection and transmission 42 6.2.3 Gas processing and distribution 43 6.2.4 Other gas users 43 6.3 Financing plan 44 6.4 Summary 45 7 Implementation 47 7.1 Pricing principles 47 7.2 Pricing proposals 47 7.3 Environmental issues 48 7.4 Summary 48 A1 Workshop presentation 49 Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 ii Contents Tables and Figures Tables Table 1 Gas supply scenarios in the GMP 8 Table 2 Total gas supplies by scenario 10 Table 3 Gas power plants development forecasts compared 22 Table 4 Industrial gas demand in the South-East area (2015) 25 Table 5 Gas demand forecast in the GMP 28 Table 6 Alternative gas demand forecast (PMP-based) 30 Figures Figure 1 Total gas supplies by scenario 12 Figure 2 Dispatched generation by fuel type (2006) 21 Figure 3 Summary gas demand forecast in the GMP 29 Figure 4 Demand forecasts compared 31 Figure 5 Supply-demand balance in South-East area from GMP 33 Figure 6 Supply-demand balance in South-East area using PMP-adjusted demand forecast 34 Figure 7 Supply-demand balance in South-West area from GMP 35 Figure 8 Supply-demand balance in South-West area using PMP-adjusted demand forecast 35 Figure 9 Supply-demand balance in South region from GMP 36 Figure 10 Supply-demand balance in South region using PMP-adjusted demand forecast 37 Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 iii Introduction 1 Introduction This report is prepared under contract to the World Bank as part of a review of PetroVietnam’s (PV’s) Gas Master Plan (GMP) for Southern Vietnam for the period 2006-2015, with an orientation to 2020. The review is to consider, in particular, the realism of the Master Plan, whether it represents the best use of resources – both natural and financial – and the sustainability of the plan in the context of development in Southern Vietnam. It should review constraints and opportunities and identify any shortcomings which are critical to achievement of the GMP. This Workshop Version Report has been prepared following the receipt of comments on a previous Inception Report from the World Bank and Vietnam’s Ministry of Industry (MOI) and is an updated version of that report. The Inception Report resulted from a desk review of an English translation of the GMP, provided by the World Bank in May 2007. The terms of reference (ToR) requested that the review should cover the following aspects: The underlying assumptions of the plan Timing of the actions Gas supply and demand projections Integration with regional gas markets Economic and financial desirability of the plan Legal and political environment for development of the plan Whether environmental impacts have been taken into consideration This focuses mainly on the first 5 of these. We also concentrate on analysis of the issues and identify questions to be examined more deeply during the field work. Our recommendations will be made after the next stage of the work. The GMP is arranged as follows: Chapter I – Overview on Gas Development and Use (not reviewed in this report). Chapter II – Gas Supply Sources in the Southern Area (reviewed in Section 3 of this report). Chapter III – Gas Consumption Market in the Southern Area (reviewed in Section 4 of this report). Chapter IV – Gas Supply-Demand Balance (reviewed in Section 5 of this report). Chapter V – Orientation for Gas Infrastructure Development in the Southern Area and Chapter VI – Investment Plan (jointly reviewed in Section 6 of this report). Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 1 Introduction Chapter VII – Implementation (reviewed in Section 7 of this report). In addition, a copy of the presentation prepared for the workshop on this report is attached as an annex. Our review begins with a summary of our major comments on the GMP. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 2 Summary 2 Summary The GMP is a well-researched document and represents the product of extensive work. However, as with all such documents, further improvements and refinements are possible. Our major comments on the GMP can be divided into three main areas where improvements can be made to clarify and justify the main proposals of the GMP: Provide some underlying economic analyses to justify the selected development options Remove or clarify apparent inconsistencies in the demand forecasts contained within the GMP and between the GMP and the Power Master Plan (PMP) The implementation strategy set out in the GMP 2.1 Economic analysis to support the proposals In view of the aim to demonstrate ‘best use of resources’ it would strengthen the GMP to demonstrate the economic rationale for the supply side (choice of upstream development options and pipeline routings) and the demand side (economic value of the alternate uses of gas). The GMP contains no apparent analysis of the value of gas to different users (eg by comparison with the cost of alternative fuels or by netting back from the price realised for outputs produced using gas). It does not show any estimates of any wider economic benefits to Vietnam from the allocation of gas to lower-value uses. It also does not provide any clear estimates of the cost of supply from new fields and imports or the comparative costs of alternate pipeline development plans and of the use of pipelines in preference to conversion of gas to electricity and its transport by electricity transmission lines. As a result, it is impossible to determine whether the proposed allocation of gas between different users maximises economic benefits to Vietnam. It is also not possible to determine whether demand projections are realistic as supply costs change. For example, our own estimates are that the value of gas in the power sector (set by the price of the alternative fuel, imported coal) is below the cost of imported gas. A strategy that assumes that imports will in future be used to meet gas demand from the power sector and that, therefore, promotes large-scale gas-fired power developments may consequently not be least-cost for Vietnam compared to alternative development plans. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 3 Summary 2.2 Remove inconsistencies in the GMP and with the PMP It is unclear whether the demand forecasts presented in the GMP are intended to represent demand projections unconstrained by supply limitations, or to incorporate these limitations. Differing approaches appear to be applied at differing points. In particular, it is unclear how the development plan in the PMP is included in the GMP’s projections. The GMP states that the PMP is an input, but the actual development plan assumed in the GMP is very different from that in the PMP1. This is particularly in the years up to 2015 when the GMP shows a large shortfall in supplies against demand from the power sector while the PMP shows a much slower development programme and, hence, lower gas demand. 2.3 Implementation strategy The implementation strategy set out in the GMP envisages PV’s involvement at all stages of the gas value chain—including making investments in major gas users such as power and fertiliser plants. The apparent inconsistencies between this and the assumptions, in the financing plan in the GMP, that major private investment will be forthcoming are not discussed or addressed. There is no consideration of whether it would be more efficient to restrict PV’s involvement to those investments where private finance is unlikely to be forthcoming due to their non-commercial nature or strategic significance. The implementation strategy also leaves unclear the future pricing strategy with regards to the sector. It appears to simultaneously propose cost-based regulated prices, the use of market pricing (based on alternative fuels) and administratively determined preferential prices for some users. In the absence of a clear pricing strategy or price assumptions, it is difficult to identify how gas prices might develop in future, the ability of the industry to finance itself and the implications for the development of gas demand. Finally, there is virtually no discussion of environmental impacts associated with the development plan in the main text of the GMP. Some assessment of the environmental costs and benefits of the GMP, including the incorporation of environmental benefits into the calculation of the economic value of gas in alternative uses, as well as of policies and safeguards to minimise adverse environmental impacts would be desirable. 2.4 Presentational issues We believe that many of these comments result from an underlying lack of clarity as regards the purpose of the GMP. It is not clear whether the GMP is intended to: 1 Draft dated 7 October 2006. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 4 Summary Set out PV’s proposed investment programme for approval by the Government (as PV’s owner) in accordance with a separate Government-determined strategy for development of the gas industry. Provide information on the likely cost and availability of future gas supplies in order to assist investment decisions by major gas users. Help determine the strategy for the development of the gas sector including establishing future organisational and regulatory arrangements. At present, the GMP appears to be trying to fulfil all these roles. An understanding of its contents and their appropriateness would be greatly assisted by a clear, up- front, statement of how the GMP should be used and what other documents (Government strategies and similar) have guided the preparation of the GMP and which it needs to comply with. As a general comment, we also note that the presentation of the GMP could be improved—in particular, with greater use of maps to show current and future pipeline routes and locations of demand centres. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 5 Gas supply sources 3 Gas supply sources This Chapter of the GMP sets out scenarios for future gas supplies in Vietnam. Our major comments on this Chapter relate to: The lack of any discussion of the costs of alternative supply sources. The very brief consideration given to alternative supply sources in the event new domestic reserves are not discovered within the period covered by the GMP forecasts. 3.1 Supply scenarios The GMP contains an extended discussion of the current status of each field for which reserve data exists. The 2P2 recoverable reserves are reported on a block by block basis with varying degrees of firmness depending on whether these result from reserve appraisals, estimates or development plans. We have no reason to consider that these estimates are unreliable. It is very helpful that the GMP uses apparently the same or similar approach to reserve classification as international best practice. However, it is not entirely clear if the use of terms (‘firm’, ‘probable’, ‘possible’) corresponds precisely with international practice for the use of 1P, 2P and 3P reserve classification. It would help understanding of the reserve estimates as well as facilitating new international investment if this issue could be clarified. Four scenarios for future gas supply from domestic fields are reported: Firm: Only those fields currently producing are included. Probable: Only those fields currently producing or for which field development plants (FDPs) have been prepared are included. Possible: All fields in the probable case as well as discovered fields for which no development plan has been prepared are included. Potential: All fields in the possible case as well as the inclusion of production from the Phu Khanh and Tu Chinh – Vu May basins and assumed higher level of recoverable reserves in the White Lion field. The various scenarios are shown overleaf, in Table 1, with the supply from each field and the scenarios in which that field is included. Table 2 and Figure 1 provide a summary of the total supply under each scenario. 2Proven plus probable. This is a standard industry measure. We do not know what system Vietnam uses to classify reserves but understand that a new system has applied since 2005 based on Western standards (Nguyen V D and Pham T V. “Presentation by the participating CCOP countries: Vietnamâ€?. CCOP-PPM Project: 5th PPM Seminar, July 2006, Bangkok). Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 6 Gas supply sources The tables and projections do not distinguish clearly between associated and non- associated gas. As these are rather different in nature, a clearer distinction would have been helpful. Although not stated in the GMP, we assumed that, in each case, the forecast production from each field is based on the 2P recoverable reserves. These supply scenarios, therefore, should not be considered to correlate to the proven, probable and possible estimates of field reserves but rather to the degree of confidence PV has that recoverable 2P reserve estimates for each field are reliable and that production can be organised. The greatest uncertainty appears to apply to reserves in the White Lion field in the South-East area. Three reserve cases are identified (a low case, with recoverable reserves of 25.5 bcm, a medium case with recoverable reserves of 51 bcm and a high case with recoverable reserves of 68.9 bcm) corresponding to annual supplies from this field of 1.5 bcm/year, 2.5 bcm/year and 3.5 bcm/year. For the purposes of considering the future demand-supply balance, the use of the possible supply scenario as a base case would seem reasonable. It would certainly seem unlikely that known reserves would not be exploited under current conditions, unless there are major geological, cost or other difficulties. 3.2 Potential reserves It is not easy to relate these supply scenarios back to the information on recoverable reserves by field contained in the GMP. For example, the exploitation potential of the Bach Ho field in the Cuu Long Basin totals 4.16 bcm (Table II-9 and onwards). However, the remaining recoverable 2P reserve, according to Table II-1, is 6.2 bcm. Similar differences exist for other fields. These, we assume, relate to the difference between what can be exploited with current technologies and the ultimately recoverable reserves. However, it would be helpful to clarify the reasons for these differences. There is also a summary table on potential gas reserve capacity (Table II-5) which gives low, average and high cases. This includes recoverable reserves as well as discovered but not yet assessed reserves. Not enough information is provided to assess how these relate to the other information on reserves contained in the GMP. For example, under the possible supply scenario, total production from the Cuu Long Basin between 2006 and 2025 is forecast at 54.8 bcm. Table II-8 gives a low case potential reserve capacity for this basin of 79.1 bcm, an average case of 179 and a high case of 184. Part of the difference will be accounted for by production post- 2025 and a further part by the difference between recoverable reserves and what can be exploited. However, more information would have been useful—particularly for understanding Vietnam’s future supply-demand balance. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 7 Gas supply sources Table 1 Gas supply scenarios in the GMP bcm / year Firm Probable Possible Potential 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 SOUTH-EAST AREA CUU LONG BASIN Bach Ho 1.02 0.94 0.66 0.46 0.34 0.24 0.18 0.13 0.08 0.05 Rang Dong 0.40 0.27 0.23 0.15 0.14 0.12 0.10 0.07 0.06 0.04 Su Tu Den / Vang 0.01 0.10 0.31 0.30 0.28 0.15 0.08 0.14 Ca Ngu Vang 0.15 0.46 0.46 0.46 0.46 0.39 0.33 0.28 0.24 Emerald 0.20 0.40 0.43 New Fields (Phuong Dong / Te Giac Trang / Pearl / Diamond / 0.53 0.76 0.89 1.01 1.01 1.01 Topz North etc.) Su Tu Trang - Bach Ho Pipeline TOTAL BACH HO PIPELINE ( INCLUDING STT) 1.42 1.36 1.36 1.17 1.78 1.88 1.83 1.88 1.92 1.92 White Lion - Binh Thuan Pipeline (Low Reserves Case) 1.50 1.50 1.50 1.50 White Lion - Binh Thuan Pipeline (Medium Reserves Case) 2.50 2.50 2.50 2.50 TOTAL SUPPLY CUU LONG BASIN (A) 1.42 1.36 1.36 1.17 1.78 1.88 4.33 4.38 4.42 4.42 NAM CON SON BASIN Block 06-1 (LT, LÄ?) 3.75 3.50 3.50 3.50 3.30 3.30 3.30 3.20 2.70 2.70 Block 11-2 (RÄ?, RÄ?T) 0.06 0.67 0.84 1.22 1.22 1.22 1.22 1.22 1.22 1.22 Block 05-2 VÀ 05-3 (HT, MT) 1.00 2.00 2.40 2.40 2.40 2.40 Block 12W 0.10 0.50 0.60 New fields in NCS (Rong Vi Dai / Kim Cuong Tay etc.) TOTAL SUPPLY NCS BASIN (B) 3.81 4.17 4.34 4.72 5.52 6.52 6.92 6.92 6.82 6.92 Phu Khanh Basin 1.00 Tu Chinh - Vung May Basin TOTAL SUPPLY OF THE SOUTH-EAST AREA (C) =(A+B) 5.23 5.53 5.70 5.89 7.30 8.40 11.25 11.30 11.24 12.34 SOUTH-WEST AREA Block B B, 48, 52 (21 % CO2+ N2) 2.31 2.31 3.46 3.46 4.62 TOTAL SUPPLY OF BLOCK B - OMON PIPELINE (D) 2.31 2.31 3.46 3.46 4.62 Block PM3 CA + 46-CN 1.37 1.45 1.45 1.45 1.45 1.45 1.45 1.45 1.35 Complement Gas from PM3 CAA 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 Khi Mo Hoa Mai ( 46-CN ) 0.16 0.31 0.31 0.31 0.31 0.24 Block 46-2 (Probable / Possible) Block 46-2 (Potential) TOTAL SUPPLY OF PM3 - CAMAU PIPELINE (E) 1.37 1.65 1.65 1.81 1.96 1.96 1.96 1.96 1.79 TOTAL SUPPLY OF THE SOUTH-WEST AREA (F) =(D+E) 1.37 1.65 1.65 1.81 4.27 4.27 5.42 5.42 6.41 TOTAL SUPPLY OF THE SOUTHERN AREA (G)=(C+F) 5.23 6.90 7.35 7.54 9.10 12.66 15.52 16.72 16.66 18.75 Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 8 Gas supply sources bcm / year Firm Probable Possible Potential 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 SOUTH-EAST AREA CUU LONG BASIN Bach Ho 0.03 0.01 Rang Dong 0.03 0.03 Su Tu Den / Vang 0.16 Ca Ngu Vang 0.20 0.17 Emerald 0.50 0.70 0.70 0.70 0.70 0.70 0.56 0.45 0.36 0.29 New Fields (Phuong Dong / Te Giac Trang / Pearl / Diamond / 1.01 0.91 0.73 0.58 0.36 Topz North etc.) Su Tu Trang - Bach Ho Pipeline 0.14 0.57 0.72 0.94 1.00 1.00 1.00 1.00 1.00 TOTAL BACH HO PIPELINE ( INCLUDING STT) 1.93 1.96 2.00 2.00 2.00 1.70 1.56 1.45 1.36 1.29 White Lion - Binh Thuan Pipeline (Low Reserves Case) 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 White Lion - Binh Thuan Pipeline (Medium Reserves Case) 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 TOTAL SUPPLY CUU LONG BASIN (A) 4.43 4.46 4.50 4.50 4.50 4.20 4.06 3.95 3.86 3.79 NAM CON SON BASIN Block 06-1 (LT, LÄ?) 2.70 2.70 2.70 2.70 2.70 2.30 1.95 1.76 1.58 1.42 Block 11-2 (RÄ?, RÄ?T) 1.22 1.22 1.22 1.22 1.22 1.22 1.22 1.03 0.77 0.57 Block 05-2 VÀ 05-3 (HT, MT) 2.40 2.40 2.40 2.40 2.40 2.40 1.50 0.70 0.30 0.20 Block 12W 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.45 0.34 0.25 New fields in NCS (Rong Vi Dai / Kim Cuong Tay etc.) 0.70 2.09 3.53 4.57 5.19 TOTAL SUPPLY NCS BASIN (B) 6.92 6.92 6.92 6.92 6.92 7.22 7.36 7.47 7.56 7.63 Phu Khanh Basin 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 Tu Chinh - Vung May Basin 1.00 1.50 1.50 1.50 1.50 1.50 1.50 1.50 TOTAL SUPPLY OF THE SOUTH-EAST AREA (C) =(A+B) 12.85 12.88 13.92 14.42 14.42 14.42 14.42 14.42 14.42 14.42 SOUTH-WEST AREA Block B B, 48, 52 (21 % CO2+ N2) 4.62 4.62 4.62 4.62 4.62 4.62 4.62 4.62 4.62 4.62 TOTAL SUPPLY OF BLOCK B - OMON PIPELINE (D) 4.62 4.62 4.62 4.62 4.62 4.62 4.62 4.62 4.62 4.62 Block PM3 CA + 46-CN 1.35 1.35 1.35 1.35 1.35 1.35 0.98 0.78 0.76 0.52 Complement Gas from PM3 CAA 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 Khi Mo Hoa Mai ( 46-CN ) 0.13 0.06 0.02 Block 46-2 (Probable / Possible) 0.06 0.17 0.61 0.85 0.89 1.13 Block 46-2 (Potential) 0.30 0.30 0.67 0.87 0.89 1.13 TOTAL SUPPLY OF PM3 - CAMAU PIPELINE (E) 1.68 1.61 1.57 1.55 1.85 1.85 1.85 1.85 1.85 1.85 TOTAL SUPPLY OF THE SOUTH-WEST AREA (F) =(D+E) 6.31 6.23 6.19 6.17 6.47 6.47 6.47 6.47 6.47 6.47 TOTAL SUPPLY OF THE SOUTHERN AREA (G)=(C+F) 19.15 19.11 20.11 20.59 20.89 20.89 20.89 20.89 20.89 20.89 Source: GMP, Tables II-9 to II-14 Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 9 Gas supply sources Table 2 Total gas supplies by scenario bcm / year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Firm South-East Area 5.17 4.71 4.39 4.11 3.78 3.66 3.58 3.40 2.84 2.79 South-West Area 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total 5.17 4.71 4.39 4.11 3.78 3.66 3.58 3.40 2.84 2.79 Probable South-East Area 5.23 5.53 5.70 5.89 5.77 5.64 5.47 5.10 4.42 4.39 South-West Area 0.00 1.37 1.45 1.45 1.45 1.45 1.45 1.45 1.45 1.35 Total 5.23 6.90 7.15 7.34 7.22 7.09 6.92 6.55 5.87 5.74 Possible South-East Area 5.23 5.53 5.70 5.89 7.30 8.40 10.26 10.31 10.23 10.33 South-West Area 0.00 1.37 1.65 1.65 1.81 4.27 4.27 5.42 5.42 6.41 Total 5.23 6.90 7.35 7.54 9.11 12.67 14.53 15.73 15.65 16.74 Potential South-East Area 5.23 5.53 5.70 5.89 7.30 8.40 11.26 11.31 11.23 12.33 South-West Area 0.00 1.37 1.65 1.65 1.81 4.27 4.27 5.42 5.42 6.41 Total 5.23 6.90 7.35 7.54 9.11 12.67 15.53 16.73 16.65 18.74 Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 10 Gas supply sources bcm / year 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Firm South-East Area 2.76 2.74 2.70 2.70 2.70 2.30 1.95 1.76 1.58 1.42 South-West Area 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total 2.76 2.74 2.70 2.70 2.70 2.30 1.95 1.76 1.58 1.42 Probable South-East Area 4.34 4.13 3.92 3.92 3.92 3.52 3.17 2.79 2.35 1.99 South-West Area 1.35 1.35 1.35 1.35 1.41 1.52 1.59 1.63 1.65 1.65 Total 5.69 5.48 5.27 5.27 5.33 5.04 4.76 4.42 4.00 3.64 Possible South-East Area 10.35 10.38 10.42 10.42 10.42 10.42 10.42 10.42 10.42 10.42 South-West Area 6.30 6.23 6.19 6.17 6.23 6.34 6.41 6.45 6.47 6.47 Total 16.65 16.61 16.61 16.59 16.65 16.76 16.83 16.87 16.89 16.89 Potential South-East Area 12.85 12.88 13.92 14.42 14.42 14.42 14.42 14.42 14.42 14.42 South-West Area 6.30 6.23 6.19 6.17 6.47 6.47 6.47 6.47 6.47 6.47 Total 19.15 19.11 20.11 20.59 20.89 20.89 20.89 20.89 20.89 20.89 Source: GMP, Tables II-9 to II-14 Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 11 Gas supply sources Figure 1 Total gas supplies by scenario bcm / year 25.00 Firm Probable Possible Potential 20.00 15.00 10.00 5.00 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Source: GMP, Tables II-9 to II-14 Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 12 Gas supply sources 3.3 Longer-term developments The GMP contains strategic targets for the development of oil and gas production to 2025. These conform closely to forecast supplies under the possible scenario (it is not clear whether the strategic targets or supply scenarios were established first). From 2015 through to 2020, both the targets and forecast supplies are around 16 bcm/year. In the absence of further discoveries, supplies in the Southern region will decline from around 2020. PV appears to be optimistic about the potential for further discoveries provided sufficient investment is made in exploration and production activities and, therefore, does not appear unduly concerned about the possibility that demand will exceed supply in later years. If supplies do fail to meet PV’s expectations, there is potential for imports—either through the Trans-ASEAN Gas Pipeline (TAGP) from Indonesia or as LNG. The GMP is rather dismissive of these options. It notes that the TAGP Master Plan includes a pipeline from the Joint Development Area to Vietnam in 2016, but simply states that this will be feasible if “….the gas market could accept the gas transportation feeâ€? (Section II.4). No indication of what such a fee might be or the cost of supplies from this source is provided in this Chapter. The GMP concludes that LNG is not economic, stating that “….the LNG price in the world market is much higher than domestic gas prices, excluding the investment costs, transportation fee….â€? (Section II.4) and “….LNG import price now and in the near future is much too high for the Vietnamese domestic gas marketâ€? (Section II.5.4)3. No prices for LNG are provided, although a number of Asia-Pacific reference prices could have been used (eg Japan’s LNG import prices). Initiating either the TAGP line to Vietnam or LNG imports would require an extensive lead-time. A more detailed assessment of whether such major investment might be required and whether their economics mean they are suitable for provisional inclusion in the GMP—which would initiate the necessary activities to determine whether they should be pursued—would be desirable. This Chapter of the GMP does not discuss export potential. However, some discussion is provided in Chapter V later in the GMP. 3.4 Costs This chapter of the GMP contains no information on the expected costs of supplies from new fields and imports, other than statements on the high cost of LNG. Instead, such analysis as there is in the GMP appears to assume that the prices of gas from existing fields will also apply to supplies from new fields. While this may 3No actual LNG prices or evidence as to why these are too ‘high’ for the Vietnamese market are provided and so it is not possible to comment on the accuracy of this statement. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 13 Gas supply sources be reasonable in some cases (such as fields located in the same basin), it is also possible that new contracts could have both different prices and different indexation basis, therefore it would have been useful to provide more information on expected supply costs. This would assist in assessing what demand can be economically met at existing and forecast supply costs and, thereby, how the supply-demand balance will adjust as the sources of new gas changes. The only available evidence on costs in the GMP is contained in Chapter V. In Section V.6, for example, this gives a price for gas from Block B (South-West area) of US$4.37/mmbtu—significantly above the costs of existing fields. The gas transportation tariff for imports from the TAGP (originating from Indonesia and Malaysia’s Joint Development Area (JDA) and transported to Vietnam’s Block B) would be US$ 0.32/mmbtu, with a gas price at Block B after transportation of US$ 3.88/mmbtu. 3.5 Summary The firm, probable and possible supply scenarios presented in this part of the GMP appear largely well grounded—they are based on the expected exploitable level of 2P recoverable reserves in existing and known fields. The clarity of the discussion in the GMP could be improved but we have no significant concerns with these projections. Our comments are focused more on the projections in later years, where imports might be required to make up shortfalls in domestic supplies and the absence of any cost estimates. The GMP does not appear to consider what the costs of new supplies might be and, in particular, those of imports, which would then feed into the analysis of the future supply-demand balance. Cost data is available, as is shown by the discussions in Chapters V and VI of the GMP, but is not introduced at this point or used for this form of analysis. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 14 Gas consumption market 4 Gas consumption market This Chapter of the GMP sets out forecasts for demand for gas in Vietnam. Our main comments on this Chapter relate to: The GMP should provide some analysis as to the competitiveness of gas relative to other fuels and, therefore, the gas price at which demand will shift to or fail to shift away from alternative fuel sources. Address the apparent inconsistency between the GMP’s projection of demand from the power sector and the generation investment programme contained in the PMP. Clarity whether the demand forecast assumes unconstrained or constrained gas supplies. 4.1 Overall approach This chapter of the GMP presents a sector-by-sector forecast of gas demand in the South region. The approach taken to forecasting demand varies somewhat from sector to sector: Demand from the power sector is forecast using inputs from the PMP separately developed by Electricity of Vietnam (EVN). Demand from production of fertilisers and other chemicals is forecast on the basis of committed investments and PV’s assessment of whether the further development of chemicals production using natural gas would be economic at current gas prices. Demand from other industrial users appears to be forecast on the basis of feasibility studies carried out for individual pipeline projects. Demand from Compressed Natural Gas (CNG) customers appears to be based on PV’s own plans for the expansion of CNG sales, although the GMP notes that projects are currently “….postponed due to no CNG consumers.â€? (Section III.4) Overall, the approach to demand forecasting appears to be primarily based on existing Master Plans for individual sectors. While this is perhaps inevitable in an economy such as Vietnam’s, which retains a strong central planning function, it means that demand forecasts generally do not appear to take account of whether they are realistic in the light of future prices of gas and other fuels4. The only exception appears to be the chemicals sector, where PV has undertaken its own assessment of whether new production would be commercially viable. Similar 4This would, of course, require the development of forecasts of future gas supply costs, a point discussed in the preceding section of this report. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 15 Gas consumption market analysis may have been undertaken at the time of preparing forecasts for industrial demand and from CNG consumers, but this is not apparent from the GMP. The introductory part of this chapter of the GMP also contains the following statement: As long as the development of gas industry, the power plants have been main customers consuming almost gas produced and in future they have been still big, stable and long term users. Hence, the old gas consumption plans as well as the new one has the priority of development, that is to use gas for power plants, and then fertilize plants and other industry users. (GMP, p56) This statement is, we assume, only intended to apply to new users of gas, ignoring existing or committed users. The rationale behind the priority ranking adopted appears to be based on identifying customers able to enter into long-term contracts for large and stable volumes of gas supply. Ensuring long-term and reliable downstream sales is obviously important, given the long-term upstream commitments that PV will need to enter into. However, this might suggest that PV’s focus on identifying potential new gas users in the GMP is more on giving itself a ‘quiet life’ than on maximising the economic benefits of Vietnam’s gas resources. A common gas industry approach to assessing the value of gas in alternate end uses is to calculate the netback price, ie the highest price at which gas could be sold to the sector/end us, taking account of the next best alternate fuel, the relative costs of fuel transport, and the costs of switching from one fuel to the other (eg change of equipment). If this were done for all major sectors, it would be apparent which sectors had the highest economic priority for gas use. The following sub-sections consider the demand forecasts for individual sectors in more detail. These are organised in the same order as in the GMP. A summary follows. 4.2 Power The power sector is far-and-away the largest user of natural gas and will continue to be so. The GMP’s forecasts of gas demand from the power sector are determined using an assumed list of gas-fired power plants. These are taken from the separate PMP prepared by EVN, although EVN and PV iterate to some extent in the preparation of their respective Master Plans. In reviewing the assumptions and conclusions of the GMP with respect to power sector demand, we have first briefly summarised how the PMP identifies the need for new gas-fired capacity. We then discuss how the two Master Plans are integrated before considering whether the GMP takes into account possible constraints on gas demand from the power sector resulting from price or security of supply considerations. We finally briefly comment on the resulting demand forecasts contained in the GMP. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 16 Gas consumption market 4.2.1 Gas supplies in the Power Master Plan A partially translated draft of PMP VI was previously reviewed by the Consultant in late-2005. We understand that there have continued to be further amendments to PMP VI since that date, and that final approval has not yet been given by the Prime Minister. We further understand that the main unresolved issue relates to projected electricity demand growth. It therefore seems reasonable to assume that the approach taken to identifying new gas-fired capacity additions in the PMP is largely unchanged from that applied in the draft reviewed by the Consultant and therefore our comments in this part draw on our earlier PMP review. The draft of PMP VI reviewed by the Consultant made a number of assumptions detailed in Section 7.3 about the price and availability of natural gas in developing an investment plan for the power sector. In particular, it placed a ceiling on the assumed availability of natural gas, as follows: The maximum available gas supply in the South-East region was assumed to be 9.8 bcm/year and in the South-West region 5.2-5.6 / bcm/year. Gas demand from industry (including fertiliser production, metallurgy and ceramics) was assumed to rise to 1.5-2.0 bcm/year, based on forecasts provided by PV. The maximum amount of gas available for the power sector was, therefore, assumed to be 14.0 bcm/year—a quantity applied out to 2025. Supplies of associated natural gas were assumed to be exhausted by 2012, after which the Phu My and Bia Ria thermal power plants (TPPs) would switch to supply from the non-associated South Con Son field. The impacts of an alternative gas supply scenario, under which development of gas fields was slower than expected and, as a result, gas supplies in 2020-25 are restricted to 10 bcm/year was also investigated. In practice this meant that EVN restricted choices of gas-fuelled power plants available to the least-cost planning software5 to avoid a breach of this ceiling. At the financial prices for natural gas and other fuels that were used in the least-cost power sector planning process, the least-cost planning software used by EVN would generally have chose thermal power plants in the following sequence: Coal-fired TPPs in the north burning indigenous coal up to the (relatively low) ceiling of available indigenous coal supplies. Gas-fired TPPs in the south up to the ceiling on available gas supplies. Coal-fired TPPs burning imported coal (usually in the south to avoid adding to the north-south flow of electricity). 5 WASP (Wien Automated System Planning) Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 17 Gas consumption market Nuclear6. The analysis also took account of security of supply issues associated with the flows of electricity (from north to south except in dry periods) and added gas-fired capacity in the south ahead of coal-fired capacity in the north, in order to avoid the need for transmission reinforcement. The price assumed by EVN for indigenous coal was based on a regulated price that was below its opportunity (economic) cost. Nevertheless, even after adjusting this price to equal its opportunity cost (border price less transport costs), the PMP showed that electricity produced from coal-fired TPPs built using Chinese equipment and burning indigenous coal is cheaper than electricity produced from gas-fired CCGTs. This implies that the ceilings placed in the inputs to the planning software on the available supply of indigenous coal and indigenous gas are the major determinants of how many new gas-fired TPPs will be selected7. 4.2.2 Integration between PMP and GMP Supply scenarios The supply scenario applied in PMP VI appears to correspond to the possible gas supply scenario in the GMP. This shows (in Tables II-9 to II-13) gas supplies from the South-East region of 10.4 bcm/year in 2020 and from the South-West region of 6.2 bcm/year for a total of 16.6 bcm/year. Deducting an assumed supply to non- power sector customers of 1.5-2.0 bcm/year8, as in the PMP, gives an available gas supply to the power sector of around 14.5-15.0 bcm/year. Location decisions Proposals for gas pipelines in the GMP appear to be driven primarily by the locations proposed by EVN for gas-fired TPPs in the PMP. Clearly any existing or committed power plants could not be relocated but EVN and PV have a range of options for the location of new power plants and their gas/electricity transmission links. We have no evidence that the proposals in the GMP and PMP are not least- cost, but neither is there any evidence that EVN and PV have considered alternative location solutions and chosen those that have the least total cost when considering both the required gas and electricity transmission investment. This is one area that could be improved in both the GMP and the PMP. Planning software is now available that analyses investment options and costs taking account of the location of the power plants and the costs of electricity and gas transmission 6 It is not clear whether nuclear power is chosen as a least-cost option after 2018 or whether it is introduced as part of the system that is not optimised (FixSys). 7Except that a number of TPPs, including gas-fired TPPs, were approved by the Prime Minister prior to the development of the electricity Master Plan and these were introduced into the plan as committed plants. 8Approximately equal to the GMP’s reported demand from existing industrial customers and the Ca Mau fertiliser plant totalling around 1.9 bcm/year. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 18 Gas consumption market and chooses least-cost investments in electricity generation, electricity transmission and gas transmission. Such software would be useful for a combined gas and electricity investment Master Plan in Vietnam. Gas prices The PMP assumes a delivered price of US$ 3.5/mmbtu for gas from the South Con Son basin and of US$ 2.2/mmbtu for associated gas from Bach Ho, in each case escalating at 2% annually. These assumptions appear to be in line with those in the GMP although, as noted earlier, this does not give explicit assumptions on the costs of supply from new fields. The only information available is on the price of gas from Block B in the South-West area, which is given (in Section V.6) as US$4.37//mmbtu. It would have been interesting for PV and EVN to have explored at what price imported coal TPPs would be preferred over additional gas-fired TPPs in the planning software used for the PMP. This price would prove useful in: Assessing what is the most valuable use of limited gas supplies. Assessing whether gas supply constraints to the power sector can be met through alternatives such as imports through the TAGP or in the form of LNG at lower-cost than switching to imported coal TPPs. If gas-fired TPPs would continue to be preferred at higher prices, then this has two implications. For the PMP, it means that the risks associated with a large-scale gas TPP building programme when available gas supplies remain uncertain are greatly reduced. For the GMP, it means that a wider range of supply options become feasible and should be considered. Our previous analysis of the draft PMP VI indicated that there is a significant gap between the assumed price in the PMP of US$ 3.5/mmbtu and the breakeven price at which it would be cheaper for Vietnam to develop TPPs burning imported coal. We estimated this latter price to be approximately US$4/mmbtu9. From the information in the GMP, this price would seem to be at or below the cost of new supplies from fields such as Block B and imports from the TAGP. It also seems likely to be below the costs of imported LNG10. This suggests that forecasts of gas demand from the power sector might be excessively high with alternative fuels becoming lower-cost as new fields and imports replace supplies from existing Vietnamese fields. 9Assuming a landed coal price of US$50/tonne combined with the relatively low expected capital costs of coal-fired TPPs in Vietnam. 10 For example, the Singapore energy regulator has recently estimated the cost of LNG to Singapore as being between US$5.1/mmbtu to US$6.3/mmbtu, including regasification costs, at crude oil prices of US$30/bbl to US$50/bbl (EMA (2006). Presentation Material, EMA Forum in Relation to Feasibility Study of the Proposed LNG Terminal, 7 August 2006, Singapore). Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 19 Gas consumption market 4.2.3 Demand-side constraints Assuming new gas supplies can be made available at prices of US$ 4/mmbtu or lower, the power sector could lower costs by further increasing its use of natural gas and thereby displacing some or all of the new TPPs burning imported coal from the power development plan. Constraints to the penetration of natural gas in the power sector might, however, arise on the demand side due to concerns over security of supply or seasonal patterns of electricity demand that require large changes in gas supplies within each year and, consequently, increase costs due to, for example, gas storage requirements. Security of supply Increased dependence on natural gas for power should not give rise to major concerns over security of supply at a national level since a large share of supplies would continue to come from indigenous natural gas which is within the control of Vietnam11. In addition, at least for some fields, there is no linkage of prices with international energy markets. With a mix of indigenous and imported coal, indigenous hydropower and indigenous and imported gas with partial insulation of gas prices from international markets, Vietnam would have an enviable level of security of supply. Increased dependence on indigenous natural gas would improve the supply- demand balance in the south of the country and would therefore reduce the need for electricity transmission from the north to the south. This would improve security of supply in the south. Seasonality Electricity demand follows a seasonal pattern. In the south it peaks in the summer with air conditioning load. In the north it peaks in the winter but with increased economic growth and greater use of air conditioning, the pattern in the north is moving toward that of the south with a summer peak. At the present time there are limited seasonal variations in demand but in the longer term it is likely that there will be more significant swings between Spring and Autumn troughs and Summer peaks. Nevertheless, it is unlikely that this will constrain the penetration of natural gas in the electricity market for many years to come—hydro power largely acts as the ‘swing’ producer with output increasing in the wet Summer season. Generation from gas-fired plants remains effectively constant across seasons (see Figure 2, below). 11 Although the reliability of supply could depend on how many pipelines were able to transport gas from the fields to the transmission system. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 20 Gas consumption market Figure 2 Dispatched generation by fuel type (2006) GWh 35,000 Hydro Coal Gas Diesel /Oil 30,000 2,708 3,287 25,000 38% 40% 11,518 20,000 11,329 15,000 5,608 5,037 10,000 5,000 10,680 8,791 0 Winter (Oct - Mar) Summer (Apr - Sep) Source: NLDC data. Figures include reported output (purchased and not purchased by EVN) from IPPs. 4.2.4 Review of PMP and GMP development forecasts As presented in the GMP, there appear to be various inconsistencies between the power sector gas demand forecasts in the text (section III.1) and summary tables (Tables III-8 and III-9). These are illustrated in Table 3, below, which compares the demand forecasts in the GMP as well as the gas-fired plant development plan in the most recent draft of PMP VI available to us (dated 7th October 2006). Particularly noticeable is that the summary demand tables significantly advance the dates of entry for the Nhon Trach and Binh Thuan complexes and the Mien Nam plants from those in the PMP and the text of the GMP. The result is to overstate forecast gas demand from the power sector relative to the PMP in the years up to 2018 and to understate it thereafter. It may be that the PMP has subsequently been amended and the GMP tables represent the development programme contained a more recent version. As our understanding is that power demand forecasts have been increased in the most recent draft of PMP VI, this would be consistent with an accelerated investment programme and earlier entry dates for new plants. We are not able to check this. Alternatively, the GMP may be intended to represent unconstrained demand from the power sector (consistent with the use of the demand forecasts in the succeeding GMP Chapter on the supply-demand balance). In this case, it would be understandable that new power plants are shown in the first year they could physically enter. However, if this is the case, it does not seem to be carried through consistently as, in some places in the GMP text, power plant entry dates are explicitly linked to the Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 21 Gas consumption market PMP. It is also noticeable that the summary tables appear to omit some plants included in the PMP and GMP text. While this is understandable given constraints on gas supplies, there does not appear to be any discussion in the GMP as to how these constraints are imposed. Table 3 Gas power plants development forecasts compared Plant Entry date Gas demand (bcm/year) PMP VIa GMP (text) GMP (Tables GMPb III-8 / III-9) New build Phu My 2.1 2006 2006 2006 0.16 (additional GT) Ca Mau I CCGT 2007 2007 2007 0.75 Ca Mau II 2008 2008 2008 0.75 CGGT Nhon Trach I 2008 2008 2008 0.50 CCGT O Mon III 2008 2007 2009 CCGT (ST part) 0.87 O Mon III 2009 2008 2009 (combined) CCGT (GT part) Tra Noc n/i n/i 2009 0.30c O Mon I GT #1 2009 2008 2008 0.87 O Mon I GT #2 2010 2008 2008 (combined) O Mon IV 2010 2014 2012 0.76 CCGT Amata n/i 2010 n/i 0.19 Nhon Trach II 2011 2012 2009 0.70 CCGT Nhon Trach III 2012 2013 n/i 0.70 CCGT O Mon II CCGT 2013 2009 2010 0.76 Binh Thuan I 2014 2013 2009 0.75 CCGT O Mon – Can 2015 2016d n/i 1.0-1.2 Tho CCGT Binh Thuan II 2015 2014 2009 0.75 CCGT Binh Thuan III 2017 n/i n/i n/i CCGT Mien Nam 1 2018 2015e 2009 0.75 CCGT Mien Nam 2 2018 2015e 2009 0.75 Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 22 Gas consumption market Plant Entry date Gas demand (bcm/year) PMP VIa GMP (text) GMP (Tables GMPb III-8 / III-9) CCGT Mien Trung 1 2019 2017 n/i 1.0-1.2 CCGT Mien Trung 2 2020 2018 n/i 1.0-1.2 CCGT Conversion to gas firing Hiep Phuoc TPP n/i undated 2006 0.55 Can Tho TPP n/i 2008-09 n/i 0.30 Thu Duc TPP n/i 2010f 2006f 0.40 n/i Not included a Base case shown in draft dated 7th October 2006. b Base case. Demand is from Table III-2 and III-3. In some cases this differs from the demand forecasts in the text itself. c This plant does not appear in the main text of the GMP. Gas demand is taken from Table III-9. d Identified in the GMP as “O Mon 5â€?. e Identified in the GMP as “Mien Dong 1 and 2â€?. f The GMP text notes that gas supply to Thu Duc is not available under existing pipeline construction plans. Despite this, Table III-8 shows it as receiving gas from 2006. 4.3 Fertiliser and other chemicals Vietnam has commissioned one major fertiliser plant at Phu My12 and has approved the development of another major fertiliser plant at Ca Mau, scheduled to begin operations in 2008-09. Phu My consumes approximately 0.5 bcm/year and, when it reaches full operation, Ca Mau will consume a similar volume of gas. No other fertiliser demand is assumed in the GMP. The GMP states that both the Phu My and Ca Mau plants are uneconomic at current international fertiliser prices and are only financially viable if gas is supplied at a price between US$1.1 and US$1.7/mmbtu13. This is approximately half the delivered price of natural gas from existing fields. However, both are included as existing or committed investments. They were previously identified in the Chemicals Development Plan approved by the PM, and were assigned to PV for implementation. We suggest that this price calculation should be checked by PV as our estimate of the netback value of gas in fertiliser production in other countries suggest a gas price of around $3.5/mmbtu, given current international prices of urea. 12 Phu My began partial operation in 2004 but was scheduled to begin full operation at the end of 2006. 13 Prior to 2006, the PetroVietnam Fertiliser and Chemical Company (PVFCCo) purchased gas from PV (its parent) at a price of US$ 1.3/mmbtu. Following the company’s equitisation this year, gas prices will increase to US$2.2-3.6/mmbtu. (Vietnam New Service, “State tries to recover accrued earnings from equitised firmâ€?, Vietnam News, 29 May 2007). Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 23 Gas consumption market It is not clear from the GMP how gas prices to the two fertiliser plants will be subsidised14 but it seems reasonable to expect that this will be done through PV, with its losses on sales to the fertiliser plants recovered through a slightly higher gas price charged to other users. The GMP also discusses the potential for demand for gas for ethylene and methanol production. It concludes that only associated gas from the Cuu Long basin is of adequate quality for ethylene production—but these reserves would be exhausted in five years. No ready replacements are available. Therefore, development of ethylene production is unrealistic. Methanol production in Vietnam is considered to be uneconomic at current international prices. 4.4 Industrial The GMP describes the industrial customer market in the South-East area along the existing pipelines from Nam Con Son and Cuu Long basins as being in a developing stage and moving towards a mature market. The market in the South-West area is currently at the stage of establishing itself and is expected to become a growth market from 2007 before moving to a mature market by around 2014. For industry which would otherwise be using petroleum fuels, the netback price of gas is likely to be very high, given current high international oil prices. It would be useful if PV could calculate the netback price for the major industrial gas using sub- sectors. 4.4.1 South-East area In the South-East, there is an existing market among the Phu My, My Xuan and Go Dau industrial zones (IZs) served by the low pressure PM-MX-GD pipeline. Forecast demand from these customers is based on a survey of potential users. Since this pipeline commenced operations in 2003, three customers have begun using natural gas and a further eight are ready for conversion. An additional nine are capable of switching to gas. Total potential gas demand is estimated at 0.62 bcm/year and actual demand is expected to grow from 0.23 bcm/year in 2005 to 0.52 bcm/year in 2010. With the development of the Phu My–Ho Chi Minh (PM-HCM) pipeline, it will become possible to serve new IZs in the area. Demand forecasts for these IZs are taken from projections made for the PM-HCM pipeline project, and is expected to rise from 0.14 bcm/year in 2010 (the first year of operation of the new pipeline) to 0.50-0.64 bcm/year in 2020-25. The basis for these forecasts is not detailed in the GMP. These demand forecasts of 1.0-1.2 bcm/year by 2020 remain below the total potential demand for gas from industrial customers in the South-East area, which is 14 In light of current international fertiliser prices, is it necessary to subsidise gas for fertiliser production? Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 24 Gas consumption market given in the GMP as 2.4 bcm/year (Table III-6). There are also apparent discrepancies between the text of the GMP and the forecast demand totals shown in the summary table for the area (Table III-8). These are illustrated below. Table 4 Industrial gas demand in the South-East area (2015) GMP text Potential Forecast (Section demand demand III.3.1) (Table III-6) (Table III-8) PM-MX-GD IZs (low bcm/year 0.52 n/a 0.23 pressure) (a) PM-HCM IZs bcm/year 0.27 n/a 1.70 Binh Thuan bcm/year n/a n/a 0.70 Total bcm/year 0.79 2.40 2.63 a In 2010. No later forecasts are provided in the GMP text. 4.4.2 South-West area In the South-West area, gas demand from industrial customers is expected to emerge from the IZs located near the Ca Mau fertiliser plant and O Mon power plant. Forecasts for demand from these IZs appear to be based on the build up of the area of the IZs and estimated penetration rates based on the type of industrial processes being operated. The exact approach taken is not defined in the GMP. A comparison of the text of the GMP and the summary table of gas demand in the area (Table III-9) suggests that the demand forecasts used in the GMP for these customers (shown in Table III-9) are actually the maximum potential demand. This is shown as 0.50 bcm/year for the Ca Mau IZs from 2015 onwards—while the text refers to demand being forecasted as 0.21 bcm/year in 2015 and 0.24 bcm/year in 2020. Although the difference is not large in absolute terms, it does leave open the question of exactly what is the demand shown in the forecast tables in the GMP (potential maximum demand or likely demand?). 4.5 CNG The GMP states that PV has studied the use of CNG for industrial users and transportation. CNG supply is planned to 40 industrial customers in the South-West area, replacing current LPG supplies, with a market size of 0.13 bcm/year. PV also plans to test the use of CNG for 20 vehicles. In early-2003, approval was granted for the development of these projects with an initial compressor capacity of 0.15 bcm/year. However, a lack of interest customers has meant no development has taken place to date. No CNG demand appears to be included in the summary forecasts in the GMP. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 25 Gas consumption market According to the GMP, the cost of CNG from the pilot projects using gas from the Phu My Gas Distribution Station (GDS) would have been US$ 0.19/m3 (approximately US$ 4.9/mmbtu) in 2002. This would have been 15-25% lower than LPG prices. We understand that the cost of supply through conventional CNG stations in Thailand is around THB 1.6-1.8/kg (equivalent to approximately US$1.0/mmbtu), suggesting that the price received for gas supplied for CNG at these prices would be consistent with the prices obtained for other uses. 4.6 Summary The GMP’s summary gas demand forecast is shown in Table 5 and, by customer type, in Figure 3, overleaf. As discussed above, this appears to represent maximum potential rather than expected demand—although a number of constraints resulting from expected supply limitations do appear to have also been incorporated. Provided that gas can be delivered at below US$ 4/mmbtu into the South region, it appears reasonable to assume that the power sector will continue to prefer gas-fired TPPs over alternatives such as imported coal. Constraints resulting from the cost and availability of new supplies therefore remain the main barriers to increased gas use in the power sector. It would be helpful to assess the netback price of gas for use in the other major sectors (industry in particular) in order to take account of the economic value of gas in different end-uses when establishing the development plan for prioritisation of use. Where decisions are taken to give priority to less economic uses, these should be justified on the basis of the resulting wider economic benefits. As we discuss above, there are various inconsistencies between the development plan in the most recent draft of PMP VI to which we have access, the text of the GMP and the summary tables in the GMP. For comparison, we have also recalculated projected gas demand using the investment programme in the most recent version of PMP VI to which we have access and the gas demand forecasts by plant provided in the main text of the GMP. The resulting forecasts are shown in Table 6, and a summary comparison with those in the GMP is provided in Figure 4. As can be seen, under the development programme in PMP VI, gas demand would be significantly below that forecast in the GMP over the period 2009-18. The implications of this for the supply-demand balance forecast are discussed in the following section. It is not clear why this apparent discrepancy between the GMP and PMP exists. Possible reasons include: The draft of PMP VI available to us is outdated and the most recent draft contains a development programme consistent with the GMP. The GMP has not been updated to match the development programme in more recent drafts of the PMP. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 26 Gas consumption market The development programme included in PMP VI includes assumptions on constraints on gas supply, whereas the forecast demand in the GMP is unconstrained. The PMP and GMP have not been integrated effectively and have developed separate forecast development programmes in isolation from each other. The GMP is intended to identify major potential ‘anchor’ loads for new pipelines, for planning purposes. The exact date of entry of these loads is of relatively limited significance as the construction date of the pipelines, once routings are known, can be adjusted if required. The translated GMP provided to us is undated. We are, therefore, not able to determine whether it precedes or follows the draft of PMP VI available to us. Without further discussion with PV and EVN, we are also unable to determine whether differences in the dates of the Master Plans made available to us or other reasons are the cause of the apparent inconsistencies between the two sets of forecasts. Other inconsistencies arise in the demand projections contained in the text of the GMP and presented in the summary forecast tables in this section. While less significant in absolute terms than those arising from the differing power plants development programmes in the PMP and GMP, they further confuse whether the GMP is presented constrained or unconstrained demand projections. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 27 Gas consumption market Table 5 Gas demand forecast in the GMP bcm/year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 SOUTH-EAST AREA CUU LONG BASIN Ba Ria + PM 2.1 Plants 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 Low Pressure Industry Users 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 Phu My Fertliser Plant 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 TOTAL DEMAND CUU LONG BASIN 1.49 1.49 1.49 1.49 1.49 1.49 1.49 1.49 1.49 1.49 1.49 1.49 1.49 1.49 1.49 1.49 1.49 1.49 1.49 1.49 NAM CON SON BASIN Total consumption of NCS gas by EVN 1.00 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 Total consumption of NCS gas in BOT plants 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 TOTAL DEMAND NAM CON SON BASIN 2.70 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 TOTAL DEMAND CUU LONG + NAM CON SON BASINS 4.19 5.04 5.04 5.04 5.04 5.04 5.04 5.04 5.04 5.04 5.04 5.04 5.04 5.04 5.04 5.04 5.04 5.04 5.04 5.04 PHU MY - HO CHI MINH PIPELINE Nhon Trach 1 Power 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 Nhon Trach 2 Power 0.72 0.72 0.72 0.72 0.72 0.72 0.72 0.72 0.72 0.72 0.72 0.72 0.72 0.72 0.72 0.72 0.72 Hiep Phuoc Power 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 0.55 Thu Duc Power 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 Industry Users 0.70 0.70 0.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 TOTAL DEMAND PM - HCM PIPELINE 1.65 1.65 2.15 3.87 3.87 3.87 3.87 3.87 3.87 3.87 3.87 3.87 3.87 3.87 3.87 3.87 3.87 3.87 3.87 3.87 BINH THUAN Binh Thuan 1 Power 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Binh Thuan 2 Power 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Mine Nam 1 Power 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Mien Nam 2 Power 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Industry Users 0.30 0.40 0.40 0.40 0.50 0.50 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 TOTAL DEMAND BINH THUAN 0.00 0.00 0.00 3.30 3.40 3.40 3.40 3.50 3.50 3.70 3.70 3.70 3.70 3.70 3.70 3.70 3.70 3.70 3.70 3.70 TOTAL DEMAND IN SOUTH-EAST AREA 5.84 6.69 7.19 12.21 12.31 12.31 12.31 12.41 12.41 12.61 12.61 12.61 12.61 12.61 12.61 12.61 12.61 12.61 12.61 12.61 SOUTH-WEST AREA CA MAU Ca Mau 1 Power 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Ca Mau 2 Power 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Ca Mau Fertilizer Plant 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 TOTAL DEMAND CA MAU 0.00 0.75 1.50 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 O MON O Mon 1 Power 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 O Mon 2 Power 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 O Mon 3 Power 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 O Mon 4 Power 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 Tra Noc Power 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 Industry Users 0.30 0.30 0.30 0.30 0.30 0.30 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 TOTAL DEMAND O MON 0.00 0.00 0.87 2.34 3.10 3.10 3.86 3.86 3.86 4.06 4.06 4.06 4.06 4.06 4.06 4.06 4.06 4.06 4.06 4.06 TOTAL DEMAND IN SOUTH-WEST AREA 0.00 0.75 2.37 4.34 5.10 5.10 5.86 5.86 5.86 6.06 6.06 6.06 6.06 6.06 6.06 6.06 6.06 6.06 6.06 6.06 TOTAL DEMAND IN SOUTHERN AREA 5.84 7.44 9.56 16.55 17.41 17.41 18.17 18.27 18.27 18.67 18.67 18.67 18.67 18.67 18.67 18.67 18.67 18.67 18.67 18.67 Source: GMP, Tables III-8 and III-9 Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 28 Gas consumption market Figure 3 Summary gas demand forecast in the GMP bcm / year 20.00 Industry 18.00 Fertiliser Power 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 29 Gas consumption market Table 6 Alternative gas demand forecast (PMP-based) bcm/year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 SOUTH-EAST AREA CUU LONG BASIN Ba Ria + Phu My 2.1 Power 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 Phu My 2.1 Extn Power 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 Low Pressure Industry Users 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 Phu My Fertliser Plant 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 TOTAL DEMAND CUU LONG BASIN 1.65 1.65 1.65 1.65 1.65 1.65 1.65 1.65 1.65 1.65 1.65 1.65 1.65 1.65 1.65 1.65 1.65 1.65 1.65 1.65 NAM CON SON BASIN Total consumption of NCS gas by EVN 1.00 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.85 Total consumption of NCS gas in BOT plants 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 TOTAL DEMAND NAM CON SON BASIN 2.70 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 3.55 TOTAL DEMAND CUU LONG + NAM CON SON BASINS 4.35 5.20 5.20 5.20 5.20 5.20 5.20 5.20 5.20 5.20 5.20 5.20 5.20 5.20 5.20 5.20 5.20 5.20 5.20 5.20 PHU MY - HO CHI MINH PIPELINE Nhon Trach 1 Power 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 Nhon Trach 2 Power 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 Nhon Trach 3 Power 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 Industry Users 0.70 0.70 0.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 TOTAL DEMAND PM - HCM PIPELINE 0.70 0.70 1.20 2.20 2.20 2.90 3.60 3.60 3.60 3.60 3.60 3.60 3.60 3.60 3.60 3.60 3.60 3.60 3.60 3.60 BINH THUAN Binh Thuan 1 Power 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Binh Thuan 2 Power 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Binh Thuan 3 Power 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Mien Nam 1 Power 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Mien Nam 2 Power 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Industry Users 0.30 0.40 0.40 0.40 0.50 0.50 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 TOTAL DEMAND BINH THUAN 0.00 0.00 0.00 0.30 0.40 0.40 0.40 0.50 1.25 2.20 2.20 2.95 4.45 4.45 4.45 4.45 4.45 4.45 4.45 4.45 TOTAL DEMAND IN SOUTH-EAST AREA 5.05 5.90 6.40 7.70 7.80 8.50 9.20 9.30 10.05 11.00 11.00 11.75 13.25 13.25 13.25 13.25 13.25 13.25 13.25 13.25 SOUTH-WEST AREA CA MAU Ca Mau 1 Power 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Ca Mau 2 Power 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Ca Mau Fertilizer Plant 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 TOTAL DEMAND CA MAU 0.00 0.75 1.50 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 O MON O Mon 1 Power 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 O Mon 2 Power 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 O Mon 3 Power 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 O Mon 4 Power 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 Industry Users 0.30 0.30 0.30 0.30 0.30 0.30 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 TOTAL DEMAND O MON 0.00 0.00 0.00 1.17 2.80 2.80 2.80 3.56 3.56 3.76 3.76 3.76 3.76 3.76 3.76 3.76 3.76 3.76 3.76 3.76 Mien Trung 1 Power 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Mien Trung 2 Power 1.00 1.00 1.00 1.00 1.00 1.00 TOTAL DEMAND IN SOUTH-WEST AREA 0.00 0.75 1.50 3.17 4.80 4.80 4.80 5.56 5.56 5.76 5.76 5.76 5.76 6.76 7.76 7.76 7.76 7.76 7.76 7.76 TOTAL DEMAND IN SOUTHERN AREA 5.05 6.65 7.90 10.87 12.60 13.30 14.00 14.86 15.61 16.76 16.76 17.51 19.01 20.01 21.01 21.01 21.01 21.01 21.01 21.01 Source: PMP VI (base case in draft dated 7th October 2006) for power demand, GMP, Tables III-8 and III-9 for other users’ demand Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 30 Gas consumption market Figure 4 Demand forecasts compared bcm / year 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 Industry Fertiliser 4.00 Power GMP Demand Forecast 2.00 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 31 Gas supply-demand balance 5 Gas supply-demand balance This Chapter of the GMP assesses the supply-demand balance resulting from the separate supply and demand projections contained in the preceding Chapters. It sets out which potential users can be supplied under differing supply scenarios and identifies major pipeline infrastructure investments required to meet demand. Our major comments on this Chapter relate to: Expand and improve the information on how shortfalls in supply against demand might be met. Provide more explanation and information on how priorities between customers are established, where supply is inadequate to meet demand. 5.1 Supply cases The GMP examines three different supply cases for each of the South-East and South-West areas (corresponding to the firm, probable and possible supply scenarios) and one supply case for the South region as a whole (corresponding to the potential supply scenario). For each case, the GMP identifies which customers would be supplied and which demand would not be met. 5.1.1 South-East area Under the firm supply scenario, insufficient gas is available to supply demand from existing users in the South-East area at present. If supply increases to the level in the probable scenario, then existing users can be supplied until 2011-2012, but no supplies can be made available to serve new users. The GMP does not discuss how, in this case, these customers might be supplied. Only under the possible supply scenario (where supplies from fields that are discovered but for which no development plan exists are included) do projected supplies become adequate to meet demand in the South-East area from existing and committed15 customers, as well as permitting the development of new customers including Nhon Trach 2 Power Plant and industrial users. Depending on the level of recoverable reserves in the White Lion field, it is also possible to develop a new power complex in Binh Thuan. These developments will require investments in new pipelines to bring gas from the White Lion field to the Bach Ho system and Binh Thuan province. 15Committed customers are not defined. From the information available in the GMP, they appear to include new power plants due to enter by 2008 with the exception of O Mon 1 (ie, Hiep Phuoc conversion to gas firing, Nhon Trach 1, Ca Mau and Ca Mau 2 power plants). Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 32 Gas supply-demand balance Figure 6, below, shows the demand projections in the GMP (existing, committed and additional users) against supplies under the firm, probable and possible scenarios. Figure 5 Supply-demand balance in South-East area from GMP bcm / year 20.00 New users 18.00 Committed users Existing users Possible Supply 16.00 Probable Supply Firm Supply 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 For comparison, Figure 6, below, shows the same supply scenarios and demand projections using our adjusted demand forecasts developed using the PMP (see Table 6). In this case, we have defined committed demand as including all power plants due to enter service by 2009 (ie, within three years). As can be seen, the slower pace of development of gas-fired capacity under the PMP would mean that supplies under the possible scenario (which we have suggested might form a reasonable base case) are adequate to meet demand in the South-East area until 2014 or so. This compares with supplies under the possible scenario being inadequate at all times under the demand projections contained in the GMP. While this latter result might be consistent with the demand projections being unconstrained, it does not conform well to the idea that the GMP and PMP are integrated. It is also of limited help for planning purposes as it represents a scenario that is infeasible. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 33 Gas supply-demand balance Figure 6 Supply-demand balance in South-East area using PMP-adjusted demand forecast bcm / year 20.00 New users 18.00 Committed users Existing users Potential Supply 16.00 Possible Supply Firm Supply 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 5.1.2 South-West area Projections in the GMP for the future supply-demand balance for the South-West area suggest that, under the probable supply scenario, there will be adequate supplies to serve the already-committed Ca Mau 1 and 2 power plants who are considered to be the only committed users. However, there will not be sufficient supplies for the Ca Mau fertiliser plant and the O Mon power complex. Under the possible supply scenario, sufficient gas will be available to supply these users although the entry of the O Mon power plants may need to be delayed a few years from the dates assumed in the GMP until sufficient gas is available. The supply-demand forecasts for the South-West area from the GMP are shown in Figure 7, below. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 34 Gas supply-demand balance Figure 7 Supply-demand balance in South-West area from GMP bcm / year 20.00 New users 18.00 Committed users Existing users Possible Supply 16.00 Probable Supply Firm Supply 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 As for the South-East area, we have also shown the supply-demand balance (in Figure 8, below) assuming a power plant development schedule in line with the PMP. For this purpose, given our understanding of their state of development, we have also treated the O Mon 2 power plant and the Ca Mau fertiliser plant as being committed. Figure 8 Supply-demand balance in South-West area using PMP-adjusted demand forecast bcm / year 20.00 New users 18.00 Committed users Existing users Possible Supply 16.00 Probable Supply Firm Supply 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 35 Gas supply-demand balance It seems clear that only if new discovered fields commence supply as projected will demand from actually committed (as opposed to those assumed as committed in the GMP), let alone new users, be met. As for the South-East area, the GMP contains no discussion of what alternative supply options for the O Mon complex and the Ca Mau fertiliser plant might be implemented if output from discovered fields falls short of expectations. 5.1.3 Potential scenario for the South region The GMP only discusses the potential supply scenario in relation to the South region as a whole, on the basis that, under this scenario, it becomes necessary to construct an inter-connection between the South-East and South-West areas. The discussion of the potential scenario in the GMP is focused on how the projected surplus supplies post-2015 can best be utilised. There appears to be an assumption that entry by new users, largely power plants, can be postponed from the schedule in the GMP to conform to the supply profile under this scenario with no undue difficulties or knock-on impacts on future gas demand. Projected demand and supply in the South region under the potential supply scenario in the GMP are shown below. Figure 9 Supply-demand balance in South region from GMP bcm / year 25.00 New users Committed users Existing users Potential Supply Possible Supply 20.00 Probable Supply Firm Supply 15.00 10.00 5.00 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 When gas demand is recalculated using the PMP’s investment programme, it can be seen that demand is below the potential supply profile in almost every year (see Figure 10, below). Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 36 Gas supply-demand balance Figure 10 Supply-demand balance in South region using PMP-adjusted demand forecast bcm / year 25.00 New users Committed users Existing users Potential Supply Possible Supply 20.00 Probable Supply Firm Supply 15.00 10.00 5.00 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 5.2 Meeting shortfalls in supply Shortfalls in supply projections against unconstrained demand can be closed in two ways: Increases in supply, through the use of imports. Reductions in demand, through either price increases or administrative restrictions. In practice, of course, the two approaches will tend to interact. Assuming that imports are more costly than domestic gas supplies (otherwise, imports would be preferred over domestic production), then using imports to close the gap will increase gas prices thereby reducing demand. This Chapter of the GMP, as with the previous Chapters, has little to say about whether imports are a realistic supply option, what the costs of such imports might be and whether potential users are willing to pay these costs. Instead, there appears to be an underlying assumption that demand can be curtailed to match supply at little cost (presumably, if prices are not adjusted upwards, through administrative measures). Further discussion of whether this is realistic would be welcome. In particular, given the lead-time required for construction of power plants, a decision to reduce gas demand from the power sector and replace gas-fired power plants with power plants using imported coal would require four to five years advance notice, at a minimum. That implies that decisions would need to be taken now to postpone gas-fired power plants currently due to enter in 2011-12. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 37 Gas supply-demand balance 5.3 Customer prioritisation If shortfalls of supply against unconstrained demand do emerge—as the supply- demand balances in the GMP suggest they will, then it is necessary to allocate gas between users in some way. The GMP describes (in Section IV.1) what appears to be an administratively- determined hierarchy, as follows: Gas supplies are first allocated to existing customers. Following this, gas supplies are allocated to customers under construction or for whom a commitment to supply exists. Remaining gas supplies are allocated using the following priorities: Priority is given to power plants. Next in priority are end users located near existing or already- planned pipelines. Next in priority are high demand end users. Remaining gas supplies are allocated to ‘ensure the economic efficiency’. The definitions of what comprises a ‘high demand’ user or an economically efficient use are not provided in the GMP. A general principle of master planning is to maximise net economic benefits to the country. This implies that, where gas supplies are scarce, they should be allocated to those uses where they have the most value. Determining which these users are requires an analysis of what alternative users are prepared to pay for gas supplies. Unfortunately, as we have noted earlier, the GMP does not appear to contain any analysis of this type. It is therefore not possible to identify whether the priorities applied in the GMP would maximise economic benefits to Vietnam. We have already suggested that the use of netback pricing is on of the common and helpful ways to use economic analysis to inform the debate on prioritisation of gas use. It should also be noted that some users may be able to manage with a non-firm gas supply, such as an interruptible fuel supply contract. In such cases, they can be offered gas at a lower price as they can be very helpful in balancing gas supply and demand at times of potential gas shortage16. We have no reason to believe that an economically efficient ordering would vary greatly from that applied in the GMP—on the basis that power generation 16 A common use of interruptible gas supply contracts is for supply to fertiliser production, or other industrial uses where production can either be temporarily reduced or it is possible to switch easily to alternate fuels. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 38 Gas supply-demand balance displacing the need for imported coal is likely to be the most valuable use of gas reserves followed by industrial users17 who are lowest-cost to supply (ie, located near pipelines and with large and steady loads)18. However, it would be helpful to be assured of this and, therefore, the appropriateness of the prioritisation applied in the GMP as well as its apparent conclusion that imports are not a suitable means of closing supply-demand gaps. 5.4 Summary The discussion of the supply-demand balance in the GMP leaves a number of questions unanswered: How would the shortfalls in supply relative to demand forecasts under all supply scenarios except the potential one be closed? Are imports a realistic means of closing this gap and, if so, at what cost and what resulting impacts on demand? Is the priority for allocation of gas between users consistent with maximising economic benefits to Vietnam? These questions are linked by the issue of determining what value differing users place on gas supplies. With this information, it becomes possible to determine whether it is realistic to introduce higher-cost imports to close any supply-demand gap and to confirm that the allocation of gas between users maximises economic benefits to Vietnam. Without it, no such conclusions can be drawn. 17 It is also possible that industrial users currently reliant on oil products would have a higher economic value for use of gas, given current high oil prices. 18 This assumes that, as seems to be the case, the GMP excludes non-committed fertilizer plants and similar non-viable users from its definitions of ‘high demand’ users and those located close to pipelines. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 39 Gas infrastructure development and investment plan 6 Gas infrastructure development and investment plan These Chapters of the GMP set out PV plans for new investments to meet demand and realise the supply possibilities identified earlier in the GMP, the costs of these investments and how PV plans to finance these costs. Our comments on these Chapters primarily relate to: The apparent inconsistencies between the infrastructure development plan and the demand projections provided earlier in the GMP. The lack of justification for the underlying assumption that PV will be the major investor in new gas projects, whether these can be financed commercially or not. The financing plan does not assess whether the required levels of funding can realistically be raised from domestic sources and, if not, what alternative sources are available. 6.1 Infrastructure development plan The gas infrastructure development plan set out in the GMP is based around the construction of the necessary new offshore and onshore infrastructure to transport gas from new fields to new demand centres previously identified in the GMP— notably Binh Thuan province. The main uncertainty is related to the size of the recoverable reserves in the White Lion field and, hence, the annual supplies from this source. The infrastructure plan envisages extensive industrial development in Binh Thuan province. Rather confusingly, this appears to include the development of a gas processing plant to supply LPG and possibly CNG and polyethylene or polypropylene, despite the earlier discussion of demand in the GMP apparently rejecting these as uneconomic or having insufficient suitable gas reserves available. These investments are dependent on the level of reserves in the White Lion field being equal to at least the medium case (reserves of 51 bcm). In this case, the GMP appears to favour the development of these additional gas uses, in the recognition that reserves will only be adequate to supply them for eight to ten years, in the expectation that further supply sources will be available after this period. It is not clear what analysis underlies this preference and how it relates back to the demand analysis earlier in the GMP. It is also not clear from the GMP whether investments have undergone some form of least-cost optimisation or not. It is very helpful to take the capital and operating costs of pipeline, together with the expected annual flow volumes, and calculate an expected unit cost of gas transportation for each proposed and possible pipeline route. This can be used both to calculate the cost of delivered gas as well as to Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 40 Gas infrastructure development and investment plan compare alternate pipeline configurations. The list of annexes to the GMP includes a Master Plan for infrastructure development and a location selection report, which may contain more information. The main text does contain a short discussion of options for the choice of site for industrial developments within Binh Thuan province, but little specifics. It also does not describe why Binh Thuan province was selected over other provinces. In addition to comparison of alternative pipelines, some analysis of whether it is lower-cost to transport energy in the form of gas through pipes or in the form of electricity through transmission lines would be desirable. This could be shown as part of an integrated optimisation of the location of power plants taking into account pipeline and electricity transmission network costs—as recommended in Section 4.2.2. Finally, it would be helpful, particularly in the context of potential uncertainty over the entry date of new power plants, to provide some analysis of the costs and benefits of delaying pipeline investments (potentially requiring new power plants to operate on fuel oil for a short period) as opposed to constructing these before they are required. Some basic information on the TAGP and the possible costs of supply from this source is included, but no firm conclusions are drawn as to whether this is a realistic source of future supplies. 6.2 Investment plan The investment plan in the GMP includes the development of gas resources, the gas collection and transmission systems, gas processing and distribution projects and major gas users. The discussion in the GMP is based on the premise that PV will be investing at all stages of the value chain including in power and fertiliser plants as major gas users. The focus is on how PV can raise the necessary capital to make these investments. Consequently, the GMP does not address the significant policy-related questions of: What is the most efficient means of financing the planned new investments (PV, other Government sources, private sources etc.)? Should PV’s investments be restricted to those areas where private financing is not likely to be available (eg, the transmission pipelines) leaving commercially viable investments (such as new power plants) to the private sector? What will be the sources of non-PV investment and on what terms will it be available on? If so, where will this come from and on what terms? What changes to the existing legal, regulatory and commercial framework will be necessary to attract this investment? Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 41 Gas infrastructure development and investment plan 6.2.1 Gas resources The GMP emphasises the need to increase production from domestic fields to meet projected demand. Consequently, large upstream investments in exploration, development and production are envisaged totalling US$5.9 billion (base case) to US$9.4 billion over the 20 years to 2025, or an average of US$300 to 470 million per year. For fields without a development plan, an assumed development cost of US$2.5- 3.0/boe is applied. We assume that this is based on current Vietnamese costs. Given the recent worldwide increases in costs (of drilling rigs, platforms, steel for pipelines etc), it would be worth checking whether the recent past costs are still a good guide to future costs. PV’s preferred model for upstream investments is the use of production sharing contracts (PSCs) in which PV is a joint operating company (JOC). The GMP argues that this will best assist in upgrading PV’s own capabilities—presumably with the intention that PV will, in future, be able to undertake an increasing share of exploration and production activities in Vietnam (and internationally) without external assistance. This would follow the model of other oil and has companies in the region, such as PPT in Thailand and Petronas in Malaysia. No discussion is included in the GMP as to what fiscal terms might need to be offered to investors in new fields. In particular, it would be interesting to see how the fiscal terms on offer in Vietnam compare with those in the region and whether they will remain appropriate if the costs of development of new fields exceed those of existing fields. 6.2.2 Gas collection and transmission Total investments in gas pipelines under the GMP are US$3 billion under the base case and US$4.4 billion under the high case for the period 2006-2025. PV appears to envisage investment models including build-own-operate (BOO) and business cooperation contracts (BCCs), in some cases as joint ventures (JVs) and in some cases not. The rationale for the selection of model for individual pipelines is not provided, although the text of the GMP does express a preference for JVs over BCCs where PV is a partner and BOOs where PV is an investor. In a number of cases, the GMP shows pipelines being developed by PV as 100% owner under a BOO model. Presumably, this implies that a special purpose vehicle (SPV) would undertake these projects on a project finance basis, with a contract between PV and the SPV19. While this may be seen as a means of limiting PV’s risk, it may also increase financing costs (typically project finance, because of its limited resource nature, will be more expensive than corporate finance). In addition, the resulting contractual arrangements may complicate any future opening up of pipeline to third party access (TPA). 19This assumes that PV takes title to the gas at the wellhead. If this is not the case, then the SPV would hold contracts with PV and the other owners of gas transported through the pipeline. In this case, a BOO structure may be appropriate as clarifying obligations on the parties. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 42 Gas infrastructure development and investment plan 6.2.3 Gas processing and distribution The GMP states that developing gas consumers is the responsibility of state-owned enterprises operating in the sector. This appears to be interpreted as meaning that PV must be involved in investing in major gas users. No discussion is provided as to whether these investments would be made without PV’s involvement and, therefore, whether it would be possible to finance them commercially freeing PV’s (and Government’s) resources for other purposes. PV expects to own 100% of new gas processing plants and distribution infrastructure associated with the White Lion field and, under the high case programme, 50% of a new gas processing plant in Binh Thuan province and 100% of a new fertiliser plant (assumed to be the Ca Mau plant). Total investments are between US$280 million, if limited to the gas processing plant and gas distribution infrastructure associated with the White Lion field, and US$1.5 billion, if the fertiliser plant and Binh Thuan gas processing plant are included. From the analysis in Chapter III of the GMP, it seems possible that the fertiliser plant will operate at a loss unless supplied at gas prices below those charged to other users20. Therefore, these investments appear to require PV to subsidise the domestic production of fertiliser—either through accepting a lower return than on other investments or by supplying gas at a price below that which can be realised from other uses. The implications of such non-commercial investments for PV’s financial status and ability to raise capital for other investments are not discussed. However, we can agree that the apparent non-viability of these investments means that they would be unlikely to proceed if commercially financed rather than being financed by PV. 6.2.4 Other gas users PV’s stated target is to hold 10-15% of total power generation in Vietnam by 2025. It is not clear whether PV expects to reach its target through the allocation of new gas- fired projects for development by PV, or through participation in competitive bidding for new independent power projects (IPPs) or a combination of both. The expectation is that, as the competitive power market develops, competition to develop power plants will increase. There would seem to be reason for concern that competition in the power market will be adversely affected if PV is both the supplier of gas to new power plants and is competing against other investors to build these plants. As there is likely to be strong interest in developing new generation in Vietnam, it is also unclear why PV needs to invest in these plants when it is likely that they can be financed commercially (unlike fertiliser plants). The summary of the investment plan in Table VI-121 shows total investments envisaged in major gas users (which appear to be the same as power plant 20 However, the netback value of gas to fertiliser production should be checked before concluding on this point 21Table VI-5 showing the breakdown of projected total investments in gas-fired power plants and PV’s share of this appears to be incorrectly completed. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 43 Gas infrastructure development and investment plan investments) as being in the range from US$2.8 billion to US$7 billion between 2006- 25. PV’s expected share is US$1.6 to US$2.6 billion or some 35-55% of all new gas- fired capacity added to the system. From the text of the GMP, PV appears to be expecting to undertake these investments as BOTs or BOOs as with projects previously undertaken in the sector. 6.3 Financing plan The GMP also sets out PV’s plans to finance its capital requirements under the investment plan (totalling US$4.7 billion to 2025 in the base case and US$8.5 billion in the high case), of which US$3.9 billion to US$4.7 billion would be incurred between 2006 and 2010. Of this, the largest elements relate to PV’s investments in developing gas resources and power plants (jointly 60-70% of total PV investments). PV envisages that it will finance its investments using a mix of internally-generated cash or equity (30%) and borrowing (70%). Equity sources PV’s own capital as at 2004 is reported as VND62 trillion or approximately US$3.9 billion. The GMP also identifies various restrictions on PV’s use of its available funds, including the lack of an exploration fund. This would, of course, not be a concern if PV (and Vietnam) relies on foreign firms to bear exploration costs rather than assuming that PV must take a share of these to enable it to adopt its favoured JOC model for upstream projects. The GMP contains no discussion of how PV’s capital might be converted into cash for investments. It is not evident how much of its capital is currently held in the form of cash22. There is also no consideration of what cash it might be possible to realise through the equitisation programme and how this compares to PV’s needs. Raising sufficient cash to meet PV’s equity funding of new investments between 2006-10 would require around 30-35% of PV’s total capital to be equitised, assuming no existing cash reserves are available. Debt sources Various potential sources of debt financing are discussed in the GMP. It concludes that it will be difficult for PV to access foreign and domestic (through the Development Aid Fund) concessionary loans as its activities are unlikely to meet the necessary social objectives. Export credit agencies (ECAs) are seen as a possible financing source but PV is concerned that use of these funds weakens its negotiating position relative to suppliers. They also require guarantees from the Ministry of Finance (MOF) and count against Vietnam’s foreign debt limits set by the Ministry of Planning and Investment (MPI). 22The most recent financial statements available on PV’s website appear to be for 2002, and so the necessary information cannot be obtained from this source. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 44 Gas infrastructure development and investment plan Raising finance from international capital markets (whether through bank loans or bond issues) is considered to be a long-term possibility. The high costs and complexity associated with arranging loans and the need for MOF guarantees work against the use of loans. Issuing bonds on international markets will require extensive work to standardise PV’s financial accounts with international standards and to obtain a credit rating but the GMP recommends that the necessary steps should commence given the potential significance of this source of funds in future. One option that the GMP does not appear to consider is, especially for the development of power plants, leaving these to experienced international investors with the necessary capabilities to raise debt from international markets on a project finance basis. For the short to medium-term, the GMP favours the use of domestic commercial bank loans and domestic bond issues to raise the necessary debt under the investment plan. Disadvantages of this approach are noted in the GMP, including the need for loans of the size and term required by PV to be syndicated which reduces flexibility, and the restrictions in the Credit Law that banks cannot loan an individual firm more than 15% of their owned capital without permission from the Prime Minister. There is no discussion in the GMP of whether sufficient funds are available from domestic capital markets. PV’s annual average debt requirement between 2006 and 2010 is between US$530 million and US$660 million. This represents around 6-8% of total net new loans23 in Vietnam during 2005 (although a much more significant 20- 25% of total net new loans to state-owned enterprises). However, if the total funding requirements of the investment plan (averaging US$1.6 billion to US$2 billion between 2006 and 2010) are considered, then the share of domestic credit rises to 20- 25% a year. This level of lending to a single sector is likely to be unsustainable from domestic resources—implying significant foreign funds are likely to be required to deliver the investment plan. In turn, this raises the question of whether it is necessary for PV to be involved in investments at all stages of the gas sector or whether a greater role for foreign investment, and, as a result, reduced call on domestic capital markets, is possible. Against this must be set the likely delays in mobilising such investment due to the complicated contractual arrangements required and the consequent time needed to prepare these. 6.4 Summary The infrastructure development plan and investment plan set out in the GMP raise significant questions as to the future role of PV in developing the sector. The plans appear to be based on the assumption that PV will undertake investments through the gas value chain from upstream exploration and development through to downstream uses. 23 Increase in total credit extended by banks to the economy between 2004 and December 2005 (IMF (November 2006). Vietnam: Statistical Appendix). Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 45 Gas infrastructure development and investment plan Whether this is efficient depends on a variety of issues but, in particular, on whether commercial investment would be forthcoming in these areas without PV’s involvement. If it would, then proposals for investments by PV should be reviewed against any limitations on domestic financing and on the implications for developing a more competitive industry in future (assuming this is, as in the power sector, a Government objective). It should be noted that in many other countries, the role of the national gas utility is being unbundled to separate out some specialised activities and to provide greater opportunities for private involvement. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 46 Implementation 7 Implementation The most significant element of the implementation chapter of the GMP is its discussion of pricing. 7.1 Pricing principles Initially, the chapter (in Section VII.2) states that, given that gas supply is currently a monopoly, it should be subject to Government regulation of prices. It then proceeds to set out the principles that should govern regulated prices. These include the relatively non-contentious principles that gas prices should permit PV to earn a reasonable rate of return, should encourage the development of the gas industry and should make exploration and development of new fields attractive. The list of principles also includes a statement that gas pricing should be competitive with petroleum products. While this is a standard approach to gas pricing, it represents a rather different philosophy to the apparent cost-based approach to pricing set out in other principles. There is no certainty, for example, the gas prices set on the basis of the costs of alternative fuels will allow PV to earn a reasonable return rather than, depending on movements in international crude oil prices, an excessively high or low return relative to its financing costs. In addition, two further principles are introduced which have the potential to conflict with both a cost-based approach to pricing and one based on the price of substitute fuels. The first is that gas prices to the power sector should be set to ‘reduce’ (from what level is not specified) electricity tariffs to industrial customers. The second is that use of gas instead of coal or wood will benefit the environment. In practice, assuming no tax is imposed on coal or wood to reflect their negative environmental impacts, this would seem to translate into pricing gas below cost where it is displacing coal or wood consumption. 7.2 Pricing proposals Further confusion over proposed pricing arrangements is introduced by the proposals that conclude the chapter. In particular, these state that PV and EVN should enter into gas take or pay arrangements based on market prices. It is not clear how this is consistent with the principle that gas prices should be set to minimise electricity tariffs, or what is meant by a ‘market’ price in a situation where a monopoly gas supplier exists. A proposal is also made that gas prices should differ by user. This makes sense under some pricing policies such as pricing against substitute fuels which vary by user, to ensure the viability of individual users such as fertiliser plants or under cost-based pricing where the costs of supply differ by user. However, it also implies that gas prices should not be set to maximise profits (given regulatory constraints), which would in turn imply that gas is directed to those users who can pay most and who, therefore, value gas the most. Instead, it appears to imply decisions on Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 47 Implementation allocation of gas reserves will be based on administrative or other criteria rather than price. 7.3 Environmental issues The GMP contains virtually no discussion or analysis of environmental issues— including any assessment of the environmental impacts of the GMP or how negative impacts can be mitigated. The statements in the GMP are limited to commitments to follow national and international regulations and to use advanced technologies, while recognising that increased gas use offers benefits through reducing adverse environmental impacts of other fuels. The list of annexes to the GMP does contain a reference to a ‘report on clarification of environmental factors’, but its content is unknown. Development of gas infrastructure can have large environmental benefits and costs to a country—depending on how the gas is used. Some attempt to quantify these benefits and costs (eg, in terms of replacement of other fuels) would help in the assessment of the overall economic benefits of the GMP and in the assessment of the value of gas in alternative uses. In addition, the GMP should provide additional information on what policies and safeguards will be applied to minimise the environmental impacts of its implementation. 7.4 Summary The discussion of pricing in this chapter fails to clarify what the future strategy for determining gas prices should be. The overall emphasis appears to be on pricing gas in such a way as to support the development of industry (either gas-using industries or indirectly through power generation for supply to industry) while still permitting PV to recover its costs including a reasonable profit. This may be the appropriate strategy to maximise the economic benefits of gas to Vietnam. However, it is not clear that the necessary analysis of the value of gas in different uses (including exports) has been undertaken to conclude this. The linkages between pricing policies and financing of new investments could also be brought out in more detail. Differing pricing policies will have very different implications for the ability of the sector to raise finance for new investments. Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 48 Annex: Workshop presentation A1 Workshop presentation The slides below were prepared for presentation at the workshop to be held with MOI, PVN and other stakeholders. Review of Gas Master Plan for Southern Vietnam Stakeholder Workshop Ray Tomkins William Derbyshire ECONOMIC CONSULTING ASSOCIATES LIMITED 41 Lonsdale Road London NW6 6RA UK tel +44 (0)20 7604 4545 / fax +44 (0)20 7604 4547 www.eca-uk.com Hanoi, 25 July 2007 1 © 2007 Economic Consulting Associates Ltd Overview Background to the review Key issues in 5 areas: 1 Summary 2 Removing inconsistencies Economic analysis to support the 3 proposals 4 Completing the GMP 5 Implementing the GMP 2 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 49 Annex: Workshop presentation ECA has been commissioned by the World Bank to review the Gas Master Plan (GMP) for Southern Vietnam for 2006-15 prepared by PetroVietnam (PV) Background to the review 3 © 2007 Economic Consulting Associates Ltd Objectives The review is to assess the realism, use of resources and sustainability of the GMP of the and, in particular Review The reasonableness of the GMP’s assumptions The action plan for implementation of the GMP The supply and demand assumptions in the GMP, including relative economic costs Integration into regional markets The GMP’s economic and financial bcm / year desirability 25.00 The conduciveness of the legal and policy New users Committed users Existing users Potential Supply Possible Supply 20.00 Probable Supply environment for implementing the GMP Firm Supply 15.00 10.00 The extent to which environmental 5.00 considerations have been addressed in the 0.00 2006 2007 2008 2009 2010 201 1 2012 2013 2014 2015 2016 2 017 2018 2019 2020 2021 2022 2023 2024 2025 GMP 4 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 50 Annex: Workshop presentation Scope of ECA has completed a desk review work and draft report of the GMP (English translation) ECA are now undertaking a field visit to present the preliminary results at this workshop and to discuss with stakeholders A revised report will be prepared and submitted for comment after the workshop 5 © 2007 Economic Consulting Associates Ltd Key issue 1 Summary Removing inconsistencies Economic analysis to support the proposals Completing the GMP Implementing the GMP 6 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 51 Annex: Workshop presentation Review of The GMP (Master Plan for Gas the GMP Development in Southern Vietnam) is a well researched document, which is clearly the product of extensive analysis It provides a comprehensive plan for the development of gas resources and use As with all such documents, Summary improvements could be made to clarify the findings and strengthen the justification of the proposals 7 © 2007 Economic Consulting Associates Ltd Issues The desk review has identified a identified number of key issues where improvements could be made: Apparent inconsistencies with the Power Master Plan (PMP) and within the GMP The need for further economic analysis to support the conclusions of the GMP Questions over the assumptions underlying the implementation strategy in the GMP Areas where the GMP should be Summary completed with further analyses 8 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 52 Annex: Workshop presentation Other issues The desk review has not addressed all aspects of the GMP In particular, further assessment is required of The GMP’s economic and financial desirability The conduciveness of the legal and policy environment for implementing the GMP Environmental considerations Summary The necessary information for these parts of the review will be collected during the field visit 9 © 2007 Economic Consulting Associates Ltd Key issue Summary 2 Removing inconsistencies Economic analysis to support the proposals Completing the GMP Implementing the GMP 10 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 53 Annex: Workshop presentation Inconsistencies The GMP has a number of in the GMP inconsistencies in demand projections Demands from different sectors reported in the text do not match some of the summary tables the tables appear to show maximum potential demand from each sector— not economic or most likely demand The reasons for the differences are not fully explained Removing However, the most apparent inconsistencies inconsistencies are between the Power Master Plan (PMP) and GMP 11 © 2007 Economic Consulting Associates Ltd Review of ECA has compared the investment the PMP programme in the 7th October 2006 draft PMP with the GMP The two plans may not be fully consistent the date of the translated GMP provided to ECA is not known the PMP has undergone further revision However, it does appear that very different investment programmes Removing inconsistencies are assumed 12 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 54 Annex: Workshop presentation PMP and Plant PMP VIa Entry date GMP (text) GMP (Tables Gas demand (bcm/year) GMPb GMP III-8 / III-9) New build Phu My 2.1 2006 2006 2006 0.16 (additional GT) compared Ca Mau I CCGT 2007 2007 2007 0.75 Ca Mau II 2008 2008 2008 0.75 CGGT Nhon Trach I 2008 2008 2008 0.50 CCGT O Mon III 2008 2007 2009 CCGT (ST part) 0.87 O Mon III 2009 2008 2009 (combined) CCGT (GT part) Tra Noc n/i n/i 2009 0.30c GMP advances O Mon I GT #1 2009 2008 2008 0.87 O Mon I GT #2 2010 2008 2008 (combined) entry dates of O Mon IV 2010 2014 2012 0.76 CCGT Amata n/i 2010 n/i 0.19 Nhon Trach II CCGT 2011 2012 2009 0.70 these CCGTs by Nhon Trach III CCGT 2012 2013 n/i 0.70 3 to 9 years compared with O Mon II CCGT 2013 2009 2010 0.76 Binh Thuan I 2014 2013 2009 0.75 CCGT O Mon – Can Tho CCGT 2015 2016d n/i 1.0-1.2 the PMP Binh Thuan II 2015 2014 2009 0.75 CCGT Binh Thuan III 2017 n/i n/i n/i CCGT Mien Nam 1 2018 2015e 2009 0.75 CCGT Mien Nam 2 2018 2015e 2009 0.75 Removing CCGT inconsistencies Mien Trung 1 2019 2017 n/i 1.0-1.2 CCGT Mien Trung 2 2020 2018 n/i 1.0-1.2 CCGT Conversion to gas firing Hiep Phuoc TPP n/i undated 2006 0.55 Can Tho TPP n/i 2008-09 n/i 0.30 Thu Duc TPP n/i 2010f 2006f 0.40 13 © 2007 Economic Consulting Associates Ltd Supply- bcm / year 25.00 New users Using GMP forecast demand Committed users Existing users Potential Supply Possible Supply 20.00 Probable Supply demand for gas Firm Supply balances power sector 15.00 compared 10.00 5.00 0.00 2006 20082007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 bcm / year 25.00 New users Using PMP forecast Committed users Existing users Potential Supply Possible Supply 20.00 Probable Supply demand for gas Firm Supply power sector 15.00 10.00 5.00 0.00 2006 2007 2008 2009 2010 2011 2012 2014 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 14 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 55 Annex: Workshop presentation Assessment The assumed gas supplies in the PMP conform closely to the GMP’s possible gas supply scenario However, the GMP appears to assume much earlier entry dates for new CCGTs This might represent a decision to show a ‘worst-case’ scenario for gas supplies show maximum potential gas demand rather than a most likely forecast increase the sense of urgency to make gas production and transmission investments These inconsistencies should be Removing inconsistencies resolved, and the presentation in the GMP clarified 15 © 2007 Economic Consulting Associates Ltd Key issue Summary Removing inconsistencies Economic analysis to 3 support the proposals Completing the GMP Implementing the GMP 16 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 56 Annex: Workshop presentation Use of Gas reserves are a scarce and economic depletable resource analysis As with all such resources, there is an opportunity cost to their use Economic analysis should be used to demonstrate that using the gas now offers greater net benefits to Vietnam than keeping it for future use the planned uses of gas offer the highest value to Vietnam Economic analysis if gas is planned to be sold below its opportunity cost, it should be justified by wider economic benefits 17 © 2007 Economic Consulting Associates Ltd Economic The GMP has very limited economic analysis in analysis the GMP calculations of the netback value of gas for petrochemicals, fertiliser, industry and CNG appear to have been carried out—but are not detailed in the GMP how have these calculations been used in the demand forecasts? the assumption appears to have been made that gas will be competitive with imported coal—based on the PMP The GMP does not show which uses have the highest value Economic analysis compare the value of gas in different uses with the costs of supply 18 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 57 Annex: Workshop presentation Reported EVN’s least-cost planning software gas values assumed delivered gas prices of $3.5/mmbtu from South Con San and $2.2/mmbtu from in the GMP Bach Ho (escalating at 2% pa) selected gas-fired TPPs in the South, up to the assumed limit of gas supplies Phu My and Ca Mau fertiliser plants are only viable at gas prices of $1.1- 1.7/mmbtu appears low given current international urea prices ECA estimates for value of gas in fertiliser production elsewhere are Ëœ $3.5/mmbtu Methanol and ethylene production are Economic analysis uneconomic at current gas prices Gas for CNG would be supplied at $4.9/mmbtu (in 2002) 19 © 2007 Economic Consulting Associates Ltd Missing The GMP does not appear to analysis include calculations of the netback value of gas in the power sector calculations of netback values using current international (rather than regulated domestic) prices any assessment of the future costs of gas supply from differing sources— which can be compared against its value in different uses any assessment of whether exports of gas offer greater value than its Economic analysis consumption in Vietnam any attempt to estimate a depletion premium for Vietnam 20 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 58 Annex: Workshop presentation Example The value of gas is bounded by economic the cost of supply (including depletion premium) the cost of the alternative fuel (opportunity cost / analysis netback value ECA has previously (January 2006) estimated the value of gas in the power sector as Ëœ $4/mmbtu assumes the alternative fuel is imported coal (@$50/t) above the cost of supply from existing fields below the GMP’s reported cost of gas from Block B ($4.37/mmbtu) Suggests that increased use of gas in Economic analysis the power sector, exceeding available supplies from existing fields, may be uneconomic 21 © 2007 Economic Consulting Associates Ltd Key issue Summary Removing inconsistencies Economic analysis to support the proposals 4 Completing the GMP Implementing the GMP 22 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 59 Annex: Workshop presentation Missing or The GMP could be strengthened incomplete by providing more analysis of analyses whether proposed pipeline investments are least-cost: compared to alternative pipelines compared to ‘wires’ (optimisation of location of power generation, transmission and gas pipelines) potential for integration into regional markets and for imports environmental impacts of the GMP legal and institutional framework Completing the GMP 23 © 2007 Economic Consulting Associates Ltd Least-cost The GMP does not show whether pipeline least-cost optimisation of pipeline plan plans has been undertaken In particular, there does not appear to have been any mutual optimisation of gas and power investments energy can be transported as gas (by pipe) or electricity (by wire) planning software is available to allow simultaneous optimisation Preparation of a combined gas Completing the GMP and power investment plan would be desirable 24 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 60 Annex: Workshop presentation Integration The TAGP provides opportunities into for Vietnam to integrate into the regional wider Asian market markets However, the GMP does not provide any detail on potential volumes and costs of imported gas to Vietnam potential gas exports from Vietnam The implications of integrated regional gas markets for Vietnam could be very significant— particularly with projected future Completing the GMP supply deficits 25 © 2007 Economic Consulting Associates Ltd Key issue Summary Removing inconsistencies Economic analysis to support the proposals Completing the GMP 5 Implementing the GMP 26 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 61 Annex: Workshop presentation Implementation issues Issues with the GMP’s ambitious implementation plan relate to the role of PV assumptions on the financing of investments unclear pricing policies There is also a lack of institutional and legal reforms that might be required to support the GMP’s implementation Implementing the GMP 27 © 2007 Economic Consulting Associates Ltd Role of PV The GMP foresees a central role for PV in developing all parts of the gas sector PV would be a joint operating company in new upstream developments develop new pipelines as JVs or BOOs which are 100% PV-owned own 100% of gas processing and fertiliser plants (excepting Binh Thuan) own 10-15% of total power generating capacity in Vietnam, developed on a BOT/BOO basis Implementing the GMP 28 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 62 Annex: Workshop presentation Financing The financing needs of the GMP the GMP are large $4.7 billion to 2025 under the base case ($8.5 billion under the high case) $3.9 to $4.7 billion incurred 2006-10 The GMP favours domestic commercial bank loans and bond issues as financing sources PV’s investments seen as unlikely to meet the criteria for concessionary loans ECAs not attractive as source of funds international bank loans and bond Implementing the GMP issues will require lengthy and costly preparation 29 © 2007 Economic Consulting Associates Ltd Assessment Between 2006-10 of financing average total annual investments represent 20-25% of annual domestic bank lending average PV annual investments represent 20-25% of annual domestic bank lending to SOEs These levels of required funding appear unrealistically high in relation to lending capacity of domestic market Instead, the GMP could consider increased use of foreign private sector participation rather than Implementing the GMP requiring PV to make investments 30 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 63 Annex: Workshop presentation Role of the Foreign private investors have private greater access to international sector capital markets than PV offers a potential source of new investment funds consistent with Government policy of opening up markets Would allow PV to focus on investments in monopoly infrastructure (eg pipelines) non-commercial but strategic industries (eg fertiliser plants) Implementing the GMP 31 © 2007 Economic Consulting Associates Ltd Pricing The GMP mentions 3, potentially policies contradictory, pricing policies: as gas supply is a monopoly, prices should be regulated by Government and set to recover PV’s reasonable costs gas prices should be competitive with alternative fuels gas prices to the power sector should ‘reduce’ electricity tariffs The GMP also states that: EVN and PV should enter into take-or- pay contracts using ‘market’ prices gas prices should differ by user Implementing the The pricing options also have GMP implications for financing options 32 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 64 Annex: Workshop presentation Receive feedback and comments Collect additional information Submit revised Review Report Next steps for the review 33 © 2007 Economic Consulting Associates Ltd Vietnam Gas Master Plan: Workshop Version Report Economic Consulting Associates, July 2007 65